How to purchase an existing business - Part 2

How to purchase an existing business – Part 2

What steps should be taken once you have shortlisted a business to be bought?

Once your business has been narrowed down, you must review and analyze the information below.

2.1 Recognize the rationale for an existing company’s sale?

There are many reasons a business owner might decide to sell their company, even something as basic as a seemingly harmless lifestyle decision like retirement. Or there could be a more concerning explanation, such as a fundamental issue with the company. You should fully understand the reasons behind the firms’ existing owners’ failure before making a purchase decision.

You should find out from the existing owners what difficulties they’ve faced, what they did to try to solve them, and how successful those efforts were. You should constantly be asking yourself, “Do I have what it takes to meet these challenges with new or better solutions?” when speaking with the present owner.

Keep an eye out for:

  • A poorly thought-out company idea (the intended market just does not exist).
  • Market rivals who are well ahead.
  • Existing commercial debts.
  • Geographical issues.
  • Branding problems
  • Inventory issues (excessive production costs, poor quality driving away consumers, challenging storage, unbalanced supply and demand, etc.).
  • Inadequate equipment (it needs to be upgraded but is too expensive).

Be careful to learn as much as you can about the current business’s accomplishments, setbacks, difficulties, and potential future possibilities. Talk to current clients, current workers, locals in the region, other businesses, and other people in addition to the business owner about your worries. They won’t have the seller’s bias of attempting to persuade you to buy, so they’ll give you an honest assessment of how the company is performing.

2.2 Assess the revenue of the company

It’s now time to determine whether the company merits the seller’s asking price.

A corporation can be valued using a variety of techniques depending on its earnings, forecasts, and balance sheet. Each approach has benefits and drawbacks. Here are three typical ways of valuation.

  • Asset-based valuation: The fair market worth of a company’s assets (including its real estate, equipment, and intangibles like patents or client lists) is added up, and its liabilities are subtracted. This approach of valuing works best for businesses that primarily generate money from their assets, like those that rent out real estate.
  • Market valuation: The market approach to valuing bases a price on “comparables” or “comps”—similar companies in the industry that have recently sold. This strategy can only be used if you (or a business valuation expert) can locate comparable companies that recently sold and published the financial details of their deal. Small enterprises might not be able to find anything equivalent.
  • Income-based valuation: This method of valuing a business estimates the net income it is anticipated to make over a specific period, such as five years, and then determines the current value of that anticipated future cash flow. This method works best for appraising prosperous businesses when you can predict future earnings with reasonable certainty.

Some specialists in business valuation combine two approaches, such the market approach and the income-based approach. In any event, since assessing a business’s value is a difficult procedure, you might wish to speak with a seasoned business broker or accountant who focuses on business valuations.

2.3 Bargaining for the purchasing price

It’s time to negotiate the price once you’ve made up your mind to proceed with a business acquisition and you believe you have a solid understanding of what the company is worth. Usually, you’ll accomplish this by making a verbal or written, non-binding offer. The seller will begin negotiating with you if your offer is somewhat close to the price for which they are willing to sell. In the majority of commercial deals, you will haggle over various purchase pricing and terms before reaching a provisional understanding. If you discover something during your due diligence that alters your assessment of the company’s value, you can adjust these terms at a later time. You’ll choose during the negotiation whether you want to buy the company’s assets outright or just sell the stock. For tax reasons, the majority of sellers favour stock sales. Because business activities will continue as normal under the new owner, you must agree to assume any existing legal obligations when you sell company stock. Some vendors may even lower their asking price if you agree to a stock sale.

2.4 Reliable funding

It’s time to focus on the best business out of the ones you may have been considering up to this point. The company that fits best with your resources, goals, and budget is your greatest choice. The desired size, location, sales, personnel, and other factors of your potential business should be calculated because they will provide you with a scale to keep in mind while you shop about. Determine how much you would ideally like to change a business and calculate the cost. You’ll spend money, but that won’t be all. Consider the time and effort commitments you intend to make to build the firm on your own. While some managers prefer to delegate and someday run numerous firms, others prefer to remain “on” at all times, working closely with their staff. The amount of resources you’ll need to commit to depends largely on the people and procedures already in place as well as your level of industry expertise. For instance, you would need to spend time learning the ropes or acquiring people with the knowledge if you were purchasing a tech company but lacked technical competence.

There are a few various ways to finance the purchase of a business once you’ve made the decision to proceed:

  • A business acquisition loan from the Small Business Administration (SBA). Small businesses can borrow up to $5 million under the SBA 7(a) loan program in order to start or buy a firm, provide working capital, and buy furniture, fixtures, and other company supplies. Federal government backing is provided for SBA loans, which can only be obtained from SBA-approved lenders.
  • Long-term loan To assist aspiring business owners in purchasing a company, certain banks provide small business loans. Traditional bank loans, however, can be challenging to obtain. They are typically only accessible to buyers purchasing a corporation with sizable assets who have outstanding credit scores and a successful track record in business. It’s still worthwhile to inquire about this with your neighborhood bank or credit union to see if it’s a possibility.
  • Seller-financed loans. The person who is selling you the company might be ready to lend you the cash you need to acquire it.
  • Do you possess a wealth of business expertise but few financial resources? It’s possible to get a business partner that can help with the cash. There are numerous types of business alliances. You might locate a venture capitalist who offers advice, assistance, and connections in the business world, or a silent partner who contributes money in exchange for a stake in the company but doesn’t participate in decision-making.
  • Personal resources. You can use your personal funds to pay for the purchase of a firm if you have a sizable amount of money saved up. You can combine your own money with outside financing like an SBA loan or a bank loan.

2.5 Complete full diligence

You will be given access to more details about the company once the LOI has been signed by both you and the seller. You’ll typically receive a rudimentary overview of the business’s operations when you first express interest in buying it. However, if you begin the due diligence phase, you’ll have access to any financial or legal data you deem necessary to complete the purchase.

We advise that you at the very least go over the following papers before closing:

  • The company’s organizational documentation
  • Business tax returns for the last three years
  • Income statements, balance sheets, and cash flow statements for the current year.
  • Revenue breakdown by client for the previous three years
  • Details on current business debt
  • Customer lists with any essential private information redacted
  • Can any existing contracts be transferred to the new owner?
  • Commercial leases or other real estate papers
  • Rent rolls if there are tenants on the premises
  • Franchise disclosure standard document
  • Manager and employee information
  • Promotional and marketing collateral
  • If there are any legal records for ongoing lawsuits

Business authorizations and licenses

The first thing to do is to confirm that the company you’re considering has the necessary business licenses and licenses. Make sure the present owner of the business hasn’t broken any local business licensing requirements if you’re purchasing it. A legal permit is required for businesses to continue operating in several sectors, especially those with strict regulations like the food service and child care sectors.

Organizational documentation and a letter of good standing

It’s possible that there won’t be any formal “starting” documents if the company you’re buying is a sole proprietorship or partnership. However, an organization’s documents will be on record with the state if it is a registered commercial entity, such as an LLC or corporation. This is the articles of formation for an LLC. This is the articles of incorporation for a corporation. A certificate of good standing for the company you’re interested in purchasing should be available from the secretary of state in your state as well. This attests to the company’s authorization to conduct business within the state.

Zoning rules

To ensure that the company you plan to buy isn’t breaking any zoning regulations, check your local laws. While some communities permit commercial and residential zoning that is mixed-use, others have severe limitations on the locations of enterprises. This is particularly true for establishments like pubs and nightclubs that might not be desirable in a neighborhood.

Environmental Regulations

Has this company been breaking any environmental rules or covertly dumping chemicals into the neighboring reservoir? Before pushing through with the business purchase, make sure the response is a resounding no. Verify again that this company complies with all local small business environmental requirements.

Leases and agreements

The extras that come with purchasing a business are half the fun. Make sure the landlord is okay with transferring control of these legal documents into your name, whether that include a lease for the property, the tools, or something else. If not, you’ll have to bargain for a new lease, which will add significantly to your costs.

Review any unfinished contracts the owner may have with suppliers or clients as well. This can reveal a lot. You might want to reconsider your purchase if, for instance, your investigation reveals that a single customer accounts for 90% of the company’s revenue. The potential of the company could be severely harmed if that client decides to leave.

Working on the transaction’s financing should be a priority while you conduct your due diligence. Many businesses are bought using a combination of debt and equity, which means you’ll contribute a portion of the purchase price and borrow the rest. SBA loans, conventional bank loans, and using a Rollover for Business Startups are just a few of your options here. The greatest option is a ROBS if your 401(k) is robust since you can fund the purchase without incurring debt or interest. To lessen some of the costs associated with acquiring a loan, you should ascertain whether seller financing is an option before starting your due diligence. Instead, than using a third party lender, seller financing is a loan supplied by the business owner. This usually requires a lot of paperwork from both the new business owner and the company itself. Due diligence should include working through this process because of this. When it comes time to finalize the deal, you’ll want to be sure your lender is prepared to fund.

2.6 Complete the deal

It’s time to conclude the deal if due diligence revealed no unexpected issues. Here, you will create the final purchase agreement and reach an understanding with the seller on all of its terms. To assist you in negotiating this phase of the procedure, you should always hire an attorney. They can at the very least check the purchase agreement to ensure that you are receiving the terms you agreed to in the deal. You are prepared to set a closing date and have your lender fund the transaction once both parties have signed the purchase agreement. On the day of closing, your money will normally be placed in escrow (meaning a bank or law office will hold it for safekeeping) until all paperwork is complete. Once both parties have granted their consent, the seller will get the funds, and you will become the sole owner of the company. To ensure a smooth transition of your business activities, you must apply for any required business license as soon as closure is finished. During the transition phase, several states permit you to continue using your current licenses but keep this in mind. You might not need to worry about this at all if your business acquisition is a stock buy because the business entity won’t change. You could have forgotten that you just became a small business owner at some time while navigating legal red tape.

The next step is to put the investment funds into the formal business after the business has been chosen. The owner must make sure he has enough money on hand to pay his fixed and unpredictable expenses in the short term. The completion of the business setup or purchase is the subsequent phase. When acquiring a firm, you evaluate it to determine whether it is realistic and viable for an E-2 visa. The selling and purchase agreement is the following stage. While some vendors may accept token payment in exchange for the sale and purchase document, others may demand full payment. If so, the buyer has two options: complete payment or switching sellers. The seller can finish the paperwork during the three months it takes for the visa procedure, but they might want some assurance, in which case escrow services can be used. The money is returned to the buyer if the E-2 visa application is denied. You must, however, give the seller the full amount due in cash if the seller declines to employ escrow. The establishment of the company infrastructure is required after the business licence is finalized. The owner must develop a business model with a thorough financial feasibility report after the infrastructure is set up to demonstrate the profitability of the business. A thorough financial and operational analysis, including a sales forecast, SWOT/PEST analysis, business mission and vision, marketing strategies, human resource management, organisational structure, future forecast, break-even analysis, and profit margins and expectations, must be included in the business plan.

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